Assume the Following Data for a Stock: Risk-Free Rate =

question 24

Multiple Choice

Assume the following data for a stock: Risk-free rate = 5 percent; beta (market) = 1.4; beta (size) = 0.4; beta (book-to-market) = −1.1; market risk premium = 7 percent; size risk premium = 3.7 percent; and book-to-market risk premium = 5.2 percent. Calculate the expected return on the stock using the Fama-French three-factor model.

• A)22.3 percent
• B)7.8 percent
• C)10.6 percent
• D)20.9 percent

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Definitions:

Market Index

A theoretical portfolio of investments representing a segment of the financial market, used as a benchmark to measure the performance of investments.

P/E Ratio

The Price to Earnings ratio, a valuation metric for stocks calculated by dividing the market price per share by its earnings per share.

Earnings Growth Rate

The annual rate of growth of a company's earnings per share, indicating the company's profitability trend over time.

Required Return

The minimum return an investor expects to achieve on an investment to compensate for its risk.